CHAPTER 6 GROWTH AND TRADE

2 Balanced vs. biased growth  Balanced growth, growth would result in the same proportionate increase in production of all products if product prices remain the same.  Balanced growth could be the result of increases in the country ’ s endowments of all factors by the same proportion. Or it could be the result of technology improvements of a similar magnitude in both industries.

3 Balanced vs. biased growth  Biased growth, growth can be biased toward producing more of one of the products. In this case the shift in the production-possibility curve will be skewed toward the faster-growing product.  Biased growth arises when the country ’ s endowments of different factors grow at different rates, or when improvements in production technologies are larger in one of the industries than in the other.

4 Balanced vs. biased growth

5 Growth in only one factor Rybczynski theorem, in a two-good world, and assuming that product prices are constant, growth in one factor leads to an absolute expansion in the product that uses that factor intensively and an absolute contraction in output of the product that uses the other factor intensively. British economist T. M. Rybczynski

6 Growth in only one factor

7  The Rybczynski theorem suggests that development of a new natural resource, such as oil or gas, may retard development of other lines of production, such as manufactures (e.g. the Dutch Disease). Conversely, rapid accumulation of new capital and worker skills can cause a decline in domestic production of natural resource products and make the country more reliant on imported materials.

8 Changes in the country ’ s willingness to trade  As production and consumption change with growth, a country ’ s willingness or interest in engaging in international trade can change. That is, even if the relative price between two products stays constant, the country could either: 1. Increase its willingness to trade (it could want to export and import more) or 2. Decrease its willingness to trade (it could want to export and import less).

9 Effects on the country ’ s terms of trade  Changes in a country ’ s willingness to trade can alter the country ’ s terms of trade if the country is large enough for its trade to have an impact on the international equilibrium. In turn, any change in the country ’ s terms of trade affects the extent to which the country benefits from its growth.

10 Effects on the country ’ s terms of trade  Small country, one whose trade does not affect the international price ratio.  Large country, one whose trade can have an impact on the relative international price ratio.

11 Effects on the country ’ s terms of trade  If a country is large, a change in its willingness to trade has two cases: 1. The growth reduces the country ’ s willingness to trade at any given price, the country gets two benefits from growth:  The production benefit from growth as the ppc shifts out.  The benefit from improved terms of trade as it receives a better price for its exports relative to the price that it has to pay for its imports.

12 Effects on the country ’ s terms of trade

13 Effects on the country ’ s terms of trade 2. Growth increases the country ’ s willingness to trade. This change in the equilibrium international price ratio is a deterioration in the country ’ s terms of trade. In this case the overall effect on the country ’ s well-being is not clear. Growth brings a production benefit, but the country is hurt by the subsequent decline in its terms of trade.  If the terms of trade do not decline by too much, then the country gains overall from growth, but not by as much as it would if the terms of trade did not change.  If the adverse movement is large, a surprising consequence is possible.

14 Immiserizing growth Growth that expands the country's willingness to trade causes such a large decline in the country's terms of trade that the well-being of the country declines, the situation is referred to as immiserizing growth, first pointed out by Jagdish N. Bhagwati (1958).

15 Immiserizing growth

16 Immiserizing growth Three conditions seem crucial for immiserizing growth to occur:  The growth is strongly biased toward producing more of the exportable product.  Foreign demand for the country ’ s exports is price inelastic.  The country is heavily engaged in international trade.

17 Immiserizing growth  Countries that export a diversified selection of export products do not seem to be at much risk of experiencing immiserizing growth. A developing country that relies on one or a few primary products (agricultural or mineral products) is more at risk.

18 Product cycle hypothesis A country that produces technically superior goods will sell this first to its domestic market, then to other technically advanced countries. In time, developing countries will import and later manufacture these goods, by which the original innovator will have produced new products.

19 Time Product Develop- ment Introduction Profits Sales GrowthMaturityDecline Losses/ Investments ($) Sales and Profits ($) Sales and Profits Over the Product’s Lifetime Product Life Cycle

20 IntroductionGrowthMaturityDecline SalesLowFast growth Slow growth Decline ProfitsNegativeRapid rise Falling margins Declining Cash flow NegativeModerateHighModerate

21 Assignment  格式：使用 A4 纸，正文部分用小四号字体，以 1.5 倍行间距格式打 印。答题不超过 3 页（不包括图表），可在 3 页之外附带图表，图表 必须直接与答案相关。  题目：  选择一个国家，写出该国按照 H.S.(SITC) 编码分类－两位（或三位） 数分类水平的全部进出口数据。哪些产品是该国的主要出口产品？ 哪些产品是该国的主要进口产品？（该部分的讨论应当简明扼要， 作为其他部分的引言）。  各种贸易理论在何种程度上解释了该国贸易的产品构成模式（或解 释了该模式的某些方面）？在答题中，你可以考察该国的商品出口 构成、商品进口构成、商品净出口（出口减进口）金额，以及各种 商品净出口额占该商品总贸易量（出口加进口）的百分比。此外， 还应当说明和检验各种产品的产业内贸易与理论相符合的程度。

22 Assignment  对于可得到数据的最近年份，列举出对于该国出 口商品的最大的购买国，以及该国的五个最大进 口来源国。简要讨论这种贸易伙伴国模式的可能 的原因。  要求：小组作业，两周时间完成。每小组必须且 只能选择一个国家，并确保可得到该国的资料。

23 数据的查找  → Resources → trade statistics → Links (national statistical offices)  (e.g. USA) → business & industry (foreign trade) → statistics → country/product trade data → top trading partners, trade in goods by country

24 数据的查找  → countries → select a country → trade statistics → imports, exports

25 Questions  “ According to the Rybczynski theorem, an increase in the country ’ s labor force will result in an increase in the quantity produced of the labor-intensive good, with no change in the quantity produced of the other good. ” Do you agree or disagree? Why?

26 Questions  A number of Latin American countries export coffee and import other goods. A long-term drought now reduces coffee production in the countries of this region. Assume that they remain exporters of coffee. Explain why the long-term drought in the region might lead to an increase in the region ’ s well-being or welfare. What would make this gain in well-being more likely?

27 Questions  A free-trade equilibrium exists in which the United States exports machinery and imports clothing from the rest of the world. The goods are produced with two factors: capital and labor. The trade pattern is the one predicted by the H-O theory. An increase now occurs in the U.S. endowment of capital, its abundant factor.

28 Questions 1. What is the effect on the shape and position of the U.S. production-possibility curve? 2. What is the effect on the actual production quantities in the United States if the product price ratio is unchanged? Explain. 3. What is the effect on the U.S. willingness to trade? 4. Assuming that the U.S. growth does affect the international equilibrium price ratio, what is the direction of the change in this price ratio? 5. Is it possible that U.S. national well-being declines as a result of the endowment growth and resulting change in the international price ratio? Explain.

29 Questions  Which of the following can lead to a reversal of the country ’ s trade pattern (that is, a shift in which a previously exported good becomes an imported good, or a previously imported good becomes an export good)? Consider each separately. Explain each.

30 Questions a. Growth in the country ’ s total supply (endowment) of the factor that is initially scarce in the country. b. International diffusion of technology. c. Shifting tastes of the country ’ s consumers.